
Student loan defaults could hit across demographic groups as household debt swells
Morning Consult data shows that the end of the pause will affect Americans across income brackets: At least half of federal borrowers in both lower- and middle-income households said they expect to miss payments or default, while borrowers in households making more than $100,000 per year had even larger shares who said they expect to miss payments (73%) or default on their loans (69%).
In the survey, 50% of borrowers in higher-income households said they had at least $100,000 in student loans. By comparison, 10% of borrowers in households making $50,000 to $100,000 said they had at least $100,000 in debt, and 6% of those making less than $50,000 a year reported six figures of debt.
And for the respondents who had post-graduate degrees, 47% said they had at least $100,000 in debt. Federal student loans for graduate school carry an interest rate of 6.54%, compared with a rate of 4.99% for undergraduate education.
Gains made by borrowers during the pandemic, such as increased savings, have largely been erased. And for many borrowers, especially millennials, monthly finances are stretched thin between competing debt obligations as the cost of mortgages, auto loans and credit card debt rise.
A recent study published by University of Chicago researchers found that on average, borrowers who had their student loan payments paused not only increased their consumption, but ended up with more debt.
Constantine Yannelis, one of the paper’s authors and an associate professor of finance at the University of Chicago’s Booth School of Business, noted that the study design compared those with student loan payments paused to those with privately held Federal Family Education Loan borrowers who took out loans before 2010 (and were not subject to the payment pause). But Yannelis said in an interview that while it wasn’t surprising that borrowers who had payments paused didn’t save more, it was surprising that they took on more debt instead of paying down debt.
While classical economics theories dictate that consumers might try to “smooth out” their spending, saving and debt when given more liquidity, Yannelis said the actual behavior seen in the study is consistent with more modern ideas that a share of people behave in “a hand-to-mouth manner, effectively just spending whatever comes in.”
Higher-income households aren’t immune from this phenomenon. Yannelis posited that the group may be living in higher-cost areas, and he noted that many of those in the Morning Consult survey who expected to default on their loans or miss a payment may not qualify for income-based assistance programs, such as the Income-Driven Repayment plans, which set lower monthly payment amounts based on the borrowers’ current income.
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